Rental Market Rising Supports Real Estate Investing

Demand for apartment rentals jumped in the last quarter, giving real estate investors in various markets some hope that the renters market may be softening. The National Association of Home Builders released its Multifamily Market Index (MMI) last week, showing that there are no signs of the hot condo market cooling off.

"The improving job market is driving a rebound in apartment rentals," David Wilson, NAHB president and builder from Ketchum, Idaho, said in a press release at the group's web site. "At the same time, attractive interest rates and strong price appreciation rates continue to spur condo sales."

"These numbers indicate that a healthier multifamily housing market is emerging, one in which demand more clearly aligns with supply," said NAHB Chief Economist David Seiders. "The positive outlook for the economy in general, and for job growth in particular, means that the news for multifamily housing should continue to be good."

The MMI is measured on a scale from 1 to 100, with a rating of 50 generally indicating that the number of positive responses is about the same as the number of negative responses. The 4th quarter report continued the year-long upward trend, settling upward eight points to 50.8 for mid-rate apartments.

Like all other factors in real estate, rentals are based on supply and demand, thus the tracking of available apartments for rent fell an astounding 13.2 points from 69.6 in the final quarter of 2003 to 56.4 in the fourth quarter of 2004. At the same time, the MMI tracked call volumes from prospective renters on the rise by nearly ten percent, from 45.9 to 50. The current average vacancy rate for rental apartments is 7.8 percent, down from 8.5 percent in the previous quarter.

In a booming real estate sales market, real estate investors can come out empty handed, and it's not a happy place to be. Home sales will rise because of a burgeoning job market, low interest rates, and a low supply of homes to sell. For rentals, it can work the same way, but it can backfire even when the economy is good.

In the Washington, DC area, for instance, in the late 1990s (which was 6 years ago, now -- sheesh), rents were climbing at a very high clip -- 25 percent in some markets. I teamed up with several friends to move a single-parent and her kids from a unit that just out-priced her. She liked the location, the unit, etc. -- but the rent was moving up from $1,200 to $1,450 on the anniversary date of her lease. She found a townhouse, subsidized unit for $1,250.

Now that particular multifamily development is singing the blues, dropping its rates, offering signing bonuses, and farming heavily for renters. It became so expensive that renters started buying -- it was cheaper to have a mortgage than to rent. The rental market, on the whole, out-priced itself.

It's very tempting to keep moving rents up -- and you would think it makes sense to do so, but think of the long term. Most small investors own one or two units and can get eaten alive by dropping rates if they don't keep their ear to the ground. Most investors have a mortgage on their property. If they're making a couple hundred dollars of positive cash flow per month -- a year's worth of cash flow can get eaten up with just one month of vacancy. Real estate investing can provide astounding return on investment, just don't get greedy.

You do want to charge the amount of rent your local market will bear, but you don't want your house sitting empty even for one month just because you wouldn't drop your asking rent. An investor in my neighborhood did just that. He was listing it for $2,300 per month (the going rent), but didn't watch the local market. Other mistakes he made included: not fixing up several issues inside the house, not painting the exterior when it was obvious to any passerby that it needed it. The house sat for nearly three months.

If his payment was $1,600 per month -- he just had to make more than $4,800 in payments without any support from a renters' income. That's $4,800 he will not be able to make up for a very long time. The property eventually rented for $1,700 -- his stubbornness for holding to his desired rent, cost him thousands of dollars.

As an investor -- listen to the market (both rental and sales), keep your property in shape, and respond accordingly.

Published: March 25, 2005